EL-ERIAN: The Welfare State CAN Work

Mohamed El-Erian was just on CNBC talking about what's ahead for Europe.

Unsurprisingly, he reiterated his gloomy outlook for Greece and Portugal, opining that Europe would likely draw the line at these two defaults. "Unfortunately, Portugal is more like Greece it is like Spain," he remarked, adding that Greece had been sacrificed to build a firewall to protect other European economies.

However, some of his most interesting comments were on the viability of the social welfare state, not only in Europe but in the U.S. as well. He cited Sweden as a key to understanding how this might work:

Sweden had a major banking crisis in the nineties. Major. Major. And it has bounced back. Where they have bounced back—and is a lesson for others—is they've been buying fiscal and financial soundness with growth and with a social system that has good safety nets. It can be done.

Now Sweden is small, Sweden has special circumstances, but it can be done and that is what Europe has to find. Europe has to balance austerity for deficit reasons with growth, and if it doesn't we're going to be talking about it for years and years.

When prodded about the social safety net in the United States, he added that much of the spending problem is not just rooted in programs for citizens but in the public goods (like NATO and research and development) it provides for the rest of the world:

We [provide] so many public goods [to the global economy] that at some point we also have to ask ourselves, "How are we going to pay for all this, and who else should be paying for it?"

Comments about Germany's responsibility for carrying the rest of Europe suggested that it might be facing some similar problems.